10-Q 1 a13-19815_110q.htm 10-Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2013

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                      to                                     

 

Commission File No. 001-35565

 

ABBVIE INC.

 

A Delaware Corporation

 

I.R.S. Employer Identification No.

 

 

32-0375147

 

1 North Waukegan Road

North Chicago, Illinois 60064

 

Telephone:  (847) 932-7900

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer o

 

Accelerated Filer o

 

 

 

 

 

Non-Accelerated Filer x

 

Smaller reporting company o

 

(Do not check if a smaller reporting company)

 

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         Yes o   No x

 

As of September 30, 2013, AbbVie Inc. had 1,590,861,812 shares of common stock at $0.01 par value outstanding.

 




Table of Contents

 

PART I.  Financial Information

Item 1.  Financial Statements and Supplementary Data

 

AbbVie Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings (unaudited)

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

(in millions, except per share data)

 

2013

 

2012

 

2013

 

2012

 

Net sales

 

$4,658

 

$4,508

 

$13,679

 

$13,174

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

1,092

 

1,014

 

3,299

 

3,243

 

Selling, general and administrative

 

1,261

 

1,085

 

3,904

 

3,578

 

Research and development

 

714

 

813

 

2,057

 

2,097

 

Acquired in-process research and development

 

220

 

 

290

 

260

 

Total operating costs and expenses

 

3,287

 

2,912

 

9,550

 

9,178

 

Operating earnings

 

1,371

 

1,596

 

4,129

 

3,996

 

 

 

 

 

 

 

 

 

 

 

Interest expense (income), net

 

69

 

(1)

 

210

 

(4)

 

Net foreign exchange loss

 

11

 

6

 

40

 

27

 

Other expense (income), net

 

5

 

(13)

 

(14)

 

(39)

 

Earnings before income tax expense

 

1,286

 

1,604

 

3,893

 

4,012

 

Income tax expense

 

322

 

19

 

893

 

277

 

Net earnings

 

$964

 

$1,585

 

$3,000

 

$3,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$0.60

 

$1.01

 

$1.88

 

$2.37

 

Diluted earnings per share

 

$0.60

 

$1.01

 

$1.86

 

$2.37

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$0.40

 

n/a

 

$1.60

 

n/a

 

 

 

 

 

 

 

 

 

 

 

Weighted-average basic shares outstanding (a)

 

1,590

 

1,577

 

1,588

 

1,577

 

Weighted-average diluted shares outstanding (a)

 

1,605

 

1,577

 

1,602

 

1,577

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

(a) On January 1, 2013, Abbott Laboratories distributed 1,577 million shares of AbbVie common stock.  The computation of basic and diluted earnings per common share for all periods through December 31, 2012 is calculated using the shares distributed on January 1, 2013.  Refer to Note 3 for information regarding the calculation of basic and diluted earnings per common share for the three and nine months ended September 30, 2013.

 

3



Table of Contents

 

AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

(in millions) 

 

2013

 

2012

 

2013

 

2012

 

Net earnings

 

$964

 

$1,585

 

$3,000

 

$3,735

 

Foreign currency translation gain (loss) adjustments

 

205

 

305

 

23

 

(3)

 

 

 

 

 

 

 

 

 

 

 

Pension and post-employment benefits, net of tax expense of $— and $1 for the three months ended September 30, 2013 and 2012, respectively, and $18 and $1 for the nine months ended September 30, 2013 and 2012, respectively

 

42

 

1

 

77

 

2

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on marketable equity securities, net of tax (benefits) of $— and $(13) for the three months ended September 30, 2013 and 2012, respectively, and $— and $(9) for the nine months ended September 30, 2013 and 2012, respectively

 

1

 

(21)

 

 

(15)

 

 

 

 

 

 

 

 

 

 

 

Hedging activities, net of tax (benefits) of $(2) and $(3) for the three months ended September 30, 2013 and 2012, respectively, and $— and $(2) for the nine months ended September 30, 2013 and 2012, respectively

 

(60)

 

(4)

 

(49)

 

(3)

 

Other comprehensive income (loss)

 

188

 

281

 

51

 

(19)

 

Comprehensive income

 

$1,152

 

$1,866

 

$3,051

 

$3,716

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4



Table of Contents

 

AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

 

Nine months ended
September 30,

 

(in millions) (brackets denote cash outflows)

 

2013

 

2012

 

Cash flows from operating activities

 

 

 

 

 

Net earnings

 

$3,000

 

$3,735

 

Adjustments to reconcile net earnings to net cash from operating activities:

 

 

 

 

 

Depreciation

 

289

 

352

 

Amortization of intangible assets

 

408

 

489

 

Stock-based compensation

 

175

 

156

 

Acquired in-process research and development

 

290

 

260

 

Other, net

 

28

 

38

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Accounts and other receivables

 

654

 

713

 

Inventories

 

(86)

 

(99)

 

Prepaid expenses and other assets

 

37

 

(6)

 

Accounts payable and other liabilities

 

227

 

(234)

 

Cash flows from operating activities

 

5,022

 

5,404

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Acquisitions and investments, net of cash acquired

 

(358)

 

(780)

 

Acquisitions of property and equipment

 

(340)

 

(238)

 

Purchases of investment securities

 

(631)

 

(1,825)

 

Sales of investment securities

 

2,085

 

630

 

Other

 

 

1

 

Cash flows from investing activities

 

756

 

(2,212)

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Net change in short-term borrowings

 

(603)

 

 

Dividends paid

 

(1,914)

 

 

Purchases of treasury stock

 

(119)

 

 

Proceeds from the exercise of stock options

 

244

 

 

Net transactions with Abbott Laboratories, excluding noncash items

 

(227)

 

(446)

 

Other, net

 

(76)

 

(12)

 

Cash flows from financing activities

 

(2,695)

 

(458)

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and equivalents

 

(9)

 

 

 

 

 

 

 

 

Net increase in cash and equivalents

 

3,074

 

2,734

 

Cash and equivalents, beginning of period

 

5,901

 

27

 

 

 

 

 

 

 

Cash and equivalents, end of period

 

$8,975

 

$2,761

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5



Table of Contents

 

AbbVie Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

 

 

 

September 30,

 

December 31,

 

(in millions, except share data)

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and equivalents

 

$8,975

 

$5,901

 

Short-term investments

 

621

 

2,075

 

Accounts and other receivables, net

 

3,798

 

4,298

 

Inventories, net

 

1,172

 

1,091

 

Deferred income taxes

 

1,419

 

1,446

 

Prepaid expenses and other

 

558

 

543

 

Total current assets

 

16,543

 

15,354

 

 

 

 

 

 

 

Investments

 

123

 

119

 

Property and equipment, net

 

2,244

 

2,247

 

Intangible assets, net of amortization

 

1,993

 

2,323

 

Goodwill

 

6,199

 

6,130

 

Other assets

 

1,150

 

835

 

Total assets

 

$28,252

 

$27,008

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Short-term borrowings

 

$411

 

$1,020

 

Current maturities of long-term debt and lease obligations

 

23

 

22

 

Accounts payable and accrued liabilities

 

6,441

 

5,734

 

Total current liabilities

 

6,875

 

6,776

 

 

 

 

 

 

 

Long-term liabilities

 

3,425

 

2,239

 

Long-term debt and lease obligations

 

14,375

 

14,630

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Net parent company investment in AbbVie Inc., prior to separation

 

 

3,713

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, issued 1,590,861,812 shares in 2013

 

16

 

 

Common stock held in treasury, 3,100,129 shares in 2013

 

(119)

 

 

Additional paid-in-capital

 

3,580

 

 

Retained earnings

 

1,081

 

 

Accumulated other comprehensive loss

 

(981)

 

(350)

 

Total stockholders’ equity

 

3,577

 

(350)

 

 

 

 

 

 

 

Total equity

 

3,577

 

3,363

 

 

 

 

 

 

 

Total liabilities and equity

 

$28,252

 

$27,008

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6



Table of Contents

 

AbbVie Inc. and Subsidiaries

Condensed Consolidated Statement of Equity

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

Additional

 

other

 

 

 

Net parent

 

 

 

 

 

shares

 

Common

 

Treasury

 

paid-in

 

comprehensive

 

Retained

 

company

 

 

 

(in millions)

 

outstanding

 

stock

 

stock

 

capital

 

(loss)

 

earnings

 

investment

 

Total

 

Balance at December 31, 2012

 

 

$—

 

$—

 

$—

 

($350)

 

$—

 

$3,713

 

$3,363

 

Separation-related adjustments

 

 

 

 

(1,258)

 

(682)

 

 

707

 

($1,233)

 

Reclassification of parent company net investment in connection with separation

 

 

 

 

4,420

 

 

 

(4,420)

 

$—

 

Issuance of common stock at separation

 

1,577

 

16

 

 

(16)

 

 

 

 

$—

 

Net earnings

 

 

 

 

 

 

3,000

 

 

$3,000

 

Other comprehensive income, net of tax

 

 

 

 

 

51

 

 

 

$51

 

Dividends declared

 

 

 

 

 

 

(1,919)

 

 

($1,919)

 

Stock issued (purchased) under incentive stock programs and other

 

11

 

 

(119)

 

434

 

 

 

 

$315

 

Balance at September 30, 2013 (unaudited)

 

1,588

 

$16

 

($119)

 

$3,580

 

($981)

 

$1,081

 

$—

 

$3,577

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7



Table of Contents

 

AbbVie Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

Note 1

Background and Basis of Presentation

 

 

Background

 

The principal business of AbbVie Inc. (AbbVie or the company) is the discovery, development, manufacture and sale of a broad line of proprietary pharmaceutical products.  Substantially all of AbbVie’s sales in the United States (U.S.) are to three wholesalers.  Outside the U.S., products are sold primarily to health care providers or through distributors, depending on the market served.

 

On January 1, 2013, AbbVie became an independent, publicly-traded company as a result of the distribution by Abbott Laboratories (Abbott) of 100 percent of the outstanding common stock of AbbVie to Abbott’s shareholders (the separation).  AbbVie was incorporated in Delaware on April 10, 2012.  Abbott’s Board of Directors approved the distribution of its shares of AbbVie on November 28, 2012.  AbbVie’s registration statement on Form 10 was declared effective by the U.S. Securities and Exchange Commission (SEC) on December 7, 2012.  On January 1, 2013, Abbott’s shareholders of record as of the close of business on December 12, 2012 received one share of AbbVie common stock for every one share of Abbott common stock held as of the record date.  AbbVie’s common stock began trading “regular-way” under the ticker symbol “ABBV” on the New York Stock Exchange on January 2, 2013.

 

During the nine months ended September 30, 2013, separation-related adjustments totaling $1.2 billion were recorded in stockholders’ equity.  Separation-related adjustments to additional paid-in capital principally reflected dividends to AbbVie shareholders that were declared from pre-separation earnings during the first quarter, the transfer of certain pension plan liabilities and assets from Abbott to AbbVie upon the legal split of those plans in the first quarter, and the subsequent correction of an error in the third quarter related to long-term deferred tax assets transferred to the company in connection with the separation of the pension plans.  The correction of this error, which did not impact the company’s Annual Report on Form 10-K for the year ended December 31, 2012 and prior years, resulted in a $582 million reduction to stockholders’ equity and long-term deferred tax assets, classified in other assets, in the company’s condensed consolidated balance sheet in the third quarter.  In addition, because the historical financial statements were derived from Abbott’s records, separation-related adjustments also included an adjustment to accumulated other comprehensive loss to reflect the appropriate opening balances associated with currency translation adjustments related to AbbVie’s legal entities at the separation date.  Additional separation-related adjustments to stockholders’ equity could be recorded in the future as the separation is finalized.  Refer to Note 9 for further information regarding the separation of the pension plans.

 

In connection with the separation, AbbVie and Abbott entered into transition services agreements covering certain corporate support and back office services that AbbVie has historically received from Abbott.  Such services include information technology, accounts payable, payroll, receivables collection, treasury and other financial functions, as well as order entry, warehousing, engineering support, quality assurance support and other administrative services.  These agreements facilitate the separation by allowing AbbVie to operate independently prior to establishing stand-alone back office systems across its organization.  Transition services may be provided for up to 24 months, with an option for a one-year extension.

 

During the three and nine months ended September 30, 2013,  AbbVie incurred $51 million and $151 million of separation-related expenses, including legal, information technology and regulatory fees, which were principally classified in selling, general and administrative expenses (SG&A).

 

Basis of Presentation

 

The unaudited interim condensed consolidated financial statements of AbbVie have been prepared pursuant to the rules and regulations of the SEC.  Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles (GAAP) in the United States have been omitted.  These unaudited interim condensed consolidated financial statements should be read in conjunction with the company’s audited combined financial statements and notes included in the company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

8



Table of Contents

 

It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of the company’s financial position and operating results.  Net sales and net earnings for any interim period are not necessarily indicative of future or annual results.

 

For a certain portion of AbbVie’s operations, the legal transfer of AbbVie’s assets (net of liabilities) did not occur with the separation of AbbVie on January 1, 2013 due to the time required to transfer marketing authorizations and satisfy other regulatory requirements in certain countries.  Under the terms of the separation agreement with Abbott, AbbVie is responsible for the business activities conducted by Abbott on its behalf, and is subject to the risks and entitled to the benefits generated by these operations and assets.  As a result, the related assets and liabilities and results of operations have been reported in AbbVie’s condensed consolidated financial statements as of and for the nine months ended September 30, 2013.  Net sales related to these operations for the three and nine months ended September 30, 2013 totaled approximately $192 million and $635 million, respectively.  At September 30, 2013, the assets and liabilities consisted primarily of inventories of $84 million, trade accounts receivable of $214 million, other assets of $100 million, and accounts payable and other accrued liabilities of $232 million.  The majority of these operations are expected to be transferred to AbbVie by the end of 2014.

 

Prior to the separation on January 1, 2013, the historical financial statements of AbbVie were prepared on a stand-alone basis and were derived from Abbott’s consolidated financial statements and accounting records as if the former research-based pharmaceutical business of Abbott had been part of AbbVie for all periods presented.  Accordingly, AbbVie’s financial statements for periods prior to January 1, 2013 are presented on a combined basis and reflect AbbVie’s financial position, results of operations and cash flows as its business was operated as part of Abbott prior to the separation, in conformity with U.S. GAAP.  The historical combined financial statements also reflect an allocation of expenses related to certain Abbott corporate functions, including senior management, legal, human resources, finance, information technology and quality assurance.  These expenses were allocated to AbbVie based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of revenues, headcount, square footage, number of transactions or other measures.  AbbVie considers the expense allocation methodology and results to be reasonable.  However, the allocations may not be indicative of the actual expenses that would have been incurred had AbbVie operated as an independent, publicly-traded company for the periods presented.  These allocations totaled $197 million and $599 million for the three and nine months ended September 30, 2012.

 

Note 2

Supplemental Financial Information

 

 

Inventories

 

 

 

September 30,

 

December 31,

 

(in millions)

 

2013

 

2012

 

Finished goods

 

$478

 

$547

 

Work-in-process

 

439

 

286

 

Raw materials

 

255

 

258

 

Inventories, net

 

$1,172

 

$1,091

 

 

Property and Equipment, Net

 

 

 

September 30,

 

December 31,

 

(in millions)

 

2013

 

2012

 

Property and equipment, gross

 

$6,790

 

$6,542

 

Less accumulated depreciation

 

(4,546)

 

(4,295)

 

Property and equipment, net

 

$2,244

 

$2,247

 

 

Depreciation expense was $97 million and $93 million for the three months ended September 30, 2013 and 2012, respectively, and $289 million and $352 million for the nine months ended September 30, 2013 and 2012, respectively.

 

Interest Expense (Income), Net

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

(in millions)

 

2013

 

2012

 

2013

 

2012

 

Interest expense

 

$75

 

$10

 

$225

 

$10

 

Interest income

 

(6)

 

(11)

 

(15)

 

(14)

 

Interest expense (income), net

 

$69

 

($1)

 

$210

 

($4)

 

 

9



Table of Contents

 

Note 3

Earnings Per Share

 

 

AbbVie calculates basic earnings per share (EPS) pursuant to the two-class method.  The two-class method is an earnings allocation formula that determines earnings per share for common stock and participating securities according to dividends declared and participation rights in undistributed earnings.  Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends.  AbbVie’s restricted stock units (RSUs) and restricted stock awards (RSAs) participate in dividends on the same basis as common shares and such dividends are nonforfeitable to the holder once declared.  As a result, these RSUs and RSAs meet the definition of a participating security.

 

The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock or the two-class method.  For the three and nine months ended September 30, 2013, the two-class method was more dilutive.  As such, the dilutive effect of outstanding RSUs and RSAs of approximately 5 million for both the three and nine months ended September 30, 2013 was excluded from the denominator for the calculation of diluted EPS.  Additionally, all earnings (distributed and undistributed) allocable to participating securities was excluded from the numerator for the calculation of basic and diluted earnings per share.  Earnings allocable to participating securities for the three and nine months ended September 30, 2013 were $6 million and $17 million, respectively.

 

For the three and nine months ended September 30, 2013, approximately 1 million of common shares issuable under stock-based compensation plans were excluded from the computation of earnings per common share assuming dilution because the effect would have been antidilutive.

 

Note 4

Acquisitions, Collaborations and Other Arrangements

 

 

In the first nine months of 2013 and 2012, cash outflows related to collaborations, the acquisition of product rights and other arrangements totaled $358 million and $780 million, respectively.  The company recorded acquired in-process research and development (IPR&D) charges of $220 million and $290 million for the three and nine months ended September 30, 2013, respectively.  IPR&D charges totaled $260 million for the nine months ended September 30, 2012 and were recorded during the first half of 2012.  Significant arrangements impacting the first nine months of 2013 and 2012 included the following.

 

Ablynx NV

In September 2013, AbbVie entered into a global collaboration agreement with Ablynx NV to develop and commercialize the anti-IL-6R Nanobody, ALX-0061, to treat inflammatory diseases including rheumatoid arthritis and systemic lupus erythematosus, resulting in a charge to IPR&D of $175 million.  Upon the achievement of certain development, regulatory and commercial milestones, AbbVie could make additional payments of up to $665 million, as well as royalties on net sales.

 

Galapagos NV

In September 2013, AbbVie recorded a charge to IPR&D of $45 million as a result of entering into a global collaboration with Galapagos NV (Galapagos) to discover, develop and commercialize cystic fibrosis therapies.  Upon the achievement of certain development, regulatory and commercial milestones, AbbVie could make additional payments of up to $360 million, as well as royalties on net sales.

 

In February 2012, AbbVie recorded a charge to IPR&D of $150 million as a result of entering into a global collaboration with Galapagos to develop and commercialize a next-generation, oral Janus Kinase 1 (JAK1) inhibitor in Phase II development with the potential to treat multiple autoimmune diseases.  Additional payments of approximately $1.3 billion could be required for the achievement of certain development, regulatory and commercial milestones under this agreement.

 

Alvine Pharmaceuticals, Inc.

In May 2013, AbbVie entered into a global collaboration with Alvine Pharmaceuticals, Inc. (Alvine) to develop ALV003, a novel oral treatment for patients with celiac disease.  As part of the agreement, AbbVie made an initial upfront payment of $70 million, which

 

10



Table of Contents

 

was expensed to IPR&D in the second quarter of 2013.  AbbVie could make additional payments totaling up to $275 million pursuant to this arrangement.

 

Action Pharma A/S

In May 2012, AbbVie recorded a charge to IPR&D of $110 million as a result of the acquisition of ABT-719 (previously referred to as AP214), a drug under development for the prevention of acute kidney injury associated with major cardiac surgery in patients at increased risk.

 

Reata Pharmaceuticals, Inc.

In the fourth quarter of 2011, AbbVie entered into a collaboration with Reata Pharmaceuticals (Reata) for the joint development and commercialization of second-generation oral antioxidant inflammation modulators resulting in a charge to IPR&D of $400 million, which was paid in the first quarter of 2012.

 

Note 5

Goodwill and Intangible Assets

 

 

Goodwill

The following table summarizes changes in the carrying amount of AbbVie’s goodwill.

 

(in millions)

 

 

 

Balance at December 31, 2012

 

$6,130

 

Additions

 

25

 

Currency translation and other adjustments

 

44

 

Balance at September 30, 2013

 

$6,199

 

 

Goodwill additions for the nine months ended September 30, 2013, related to product rights acquired during the second quarter.  The latest impairment assessment of goodwill was completed in the third quarter of 2013.  As of September 30, 2013, there were no accumulated goodwill impairment losses.  Future impairment tests for goodwill will be performed annually in the third quarter, or earlier if indicators of impairment exist.

 

Other Intangible Assets, Net

 

The following table summarizes AbbVie’s intangible assets.

 

 

 

September 30, 2013

 

December 31, 2012

 

 

 

Gross

 

 

 

Net

 

Gross

 

 

 

Net

 

 

 

carrying

 

Accumulated

 

carrying

 

carrying

 

Accumulated

 

carrying

 

(in millions)

 

amount

 

amortization

 

amount

 

amount

 

amortization

 

amount

 

Definite-lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Developed product rights

 

$4,737

 

($3,416)

 

$1,321

 

$4,699

 

($3,031)

 

$1,668

 

License agreements

 

997

 

(771)

 

226

 

969

 

(734)

 

235

 

Total definite-lived intangible assets

 

5,734

 

(4,187)

 

1,547

 

5,668

 

(3,765)

 

1,903

 

Indefinite-lived research and development

 

446

 

 

446

 

420

 

 

420

 

Total intangible assets

 

$6,180

 

($4,187)

 

$1,993

 

$6,088

 

($3,765)

 

$2,323

 

 

Intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives.  Amortization expense was $137 million and $134 million for the three months ended September 30, 2013 and 2012, respectively, and $408 million and $489 million for the nine months ended September 30, 2013 and 2012, respectively.  Additions related to the acquisition of amortizable intangible assets in the second quarter of 2013 with an average amortization period of 5 years.

 

The indefinite-lived intangible assets as of December 31, 2012 relate to IPR&D acquired in a business combination.  Additions related to the acquisition of IPR&D in the second quarter of 2013.  The latest impairment assessment of intangible assets not subject to amortization was completed in the third quarter of 2013.  There were no impairment charges recorded in the nine months ended September 30, 2013 and 2012.  Future impairment tests for indefinite-lived intangible assets will be performed annually in the third quarter, or earlier if indicators of impairment exist.

 

11



Table of Contents

 

Note 6

Restructuring Plans

 

 

In 2013 and prior years, AbbVie management approved plans to realign its worldwide manufacturing operations and selected domestic and international commercial and research and development operations in order to reduce costs.  In the second quarter of 2013, the company approved plans to restructure certain commercial operations in conjunction with the loss and expected loss of exclusivity of certain products.

 

Restructuring charges were $11 million and $75 million for the three and nine months ended September 30, 2013, respectively, and were primarily recorded within SG&A in the condensed consolidated statements of earnings, with the remainder recorded within research and development and cost of products sold.  Included in the charges were cash costs of $8 million and $68 million for the three and nine months ended September 30, 2013, respectively, which mainly related to employee severance and contractual obligations.

 

For the three and nine months ended September 30, 2012, AbbVie incurred restructuring charges of $176 million and $206 million, respectively.  The charge recorded in the third quarter of 2012 included cash costs of approximately $150 million for employee severance and contractual obligations, primarily related to the exit from a research and development facility, of which approximately $142 million was recorded within research and development and approximately $8 million within SG&A in the condensed consolidated statements of earnings.  The charge for the nine months ended September 30, 2012 also included $56 million of additional charges, primarily for accelerated depreciation, asset impairments and product transfer costs, of which $26 million was recorded in the third quarter of 2012.

 

The following summarizes the cash activity in the restructuring reserves for the nine months ended September 30, 2013.

 

(in millions)

 

 

 

Accrued balance at December 31, 2012

 

$193

 

2013 restructuring charges

 

68

 

Payments and other adjustments

 

(83)

 

Accrued balance at September 30, 2013

 

$178

 

 

Included in payments and other adjustments for the nine months ended September 30, 2013 was a $23 million reversal in the first quarter of a previously recorded restructuring reserve due to the company’s re-evaluation of a prior year decision to exit a manufacturing facility.

 

Note 7

Financial Instruments and Fair Value Measures

 

 

Risk Management Policy

The company is exposed to foreign currency exchange rate and interest rate risks related to its business operations.  The company’s hedging policy attempts to manage these risks to an acceptable level based on the company’s judgment of the appropriate trade-off between risk, opportunity and costs.  The company uses derivative instruments to reduce its exposure to foreign currency exchange rates.  The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates.  The company periodically enters into interest rate swaps, based on judgment, to manage interest costs in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount.  Derivative instruments are not used for trading purposes or to manage exposure to changes in interest rates for investment securities, and none of the company’s outstanding derivative instruments contain credit risk related contingent features; collateral is generally not required.

 

Financial Instruments

Various AbbVie foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany transactions denominated in a currency other than the functional currency of the local entity.  These contracts, with notional amounts totaling $1.7 billion and $1.0 billion at September 30, 2013 and December 31, 2012, respectively, are designated as cash flow hedges and are recorded at fair value.  Accumulated gains and losses

 

12



Table of Contents

 

as of September 30, 2013 will be included in cost of products sold at the time the products are sold, generally through the next twelve months.

 

The company enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans.  The contracts are marked-to-market, and resulting gains or losses are reflected in income and are generally offset by losses or gains on the foreign currency exposure being managed.  At September 30, 2013 and December 31, 2012, AbbVie held notional amounts of $4.2 billion and $4.3 billion, respectively, of such foreign currency forward exchange contracts.

 

AbbVie was a party to interest rate hedge contracts, designated as fair value hedges, totaling $8.0 billion at both September 30, 2013 and December 31, 2012.  The effect of the hedge is to change a fixed-rate interest obligation to a floating rate for that portion of the debt.  AbbVie recorded the contracts at fair value and adjusted the carrying amount of the fixed-rate debt by an offsetting amount.

 

The following table summarizes the amounts and location of AbbVie’s derivative instruments as of September 30, 2013.

 

 

 

Derivatives in asset position

 

Derivatives in liability position

 

(in millions)

 

Fair value

 

Balance sheet caption

 

Fair value

 

Balance sheet caption

 

Interest rate swaps designated as fair value hedges

 

$—

 

n/a

 

$349

 

Long-term liabilities

 

Foreign currency forward exchange contracts —

 

 

 

 

 

 

 

 

Hedging instruments

 

 

Prepaid expenses and other

 

57

 

Accounts payable and accrued liabilities

 

Others not designated as hedges

 

25

 

Prepaid expenses and other

 

26

 

Accounts payable and accrued liabilities

 

Total

 

$25

 

 

 

$432

 

 

 

 

The following table summarizes the amounts and location of AbbVie’s derivative instruments as of December 31, 2012.

 

 

 

Derivatives in asset position

 

Derivatives in liability position

 

(in millions)

 

Fair value

 

Balance sheet caption

 

Fair value

 

Balance sheet caption

 

Interest rate swaps designated as fair value hedges

 

$—

 

n/a

 

$81

 

Long-term liabilities

 

Foreign currency forward exchange contracts —

 

 

 

 

 

 

 

 

Hedging instruments

 

1

 

Prepaid expenses and other

 

10

 

Accounts payable and accrued liabilities

 

Others not designated as hedges

 

14

 

Prepaid expenses and other

 

15

 

Accounts payable and accrued liabilities

 

Total

 

$15

 

 

 

$106

 

 

 

 

While certain derivatives are subject to netting arrangements with the company’s counterparties, the company does not offset derivative assets and liabilities within the condensed consolidated balance sheets.

 

The following table summarizes the activity for derivative instruments and the amounts and location of income (expense) and gain (loss) reclassified into income and for certain other derivative instruments for the three months ended September 30, 2013 and 2012, respectively.  The amount of hedge ineffectiveness was not significant for the three months ended September 30, 2013 or 2012.

 

 

 

(Loss) gain

 

Income (expense)

 

 

 

 

 

recognized in other

 

and gain (loss)

 

 

 

 

 

comprehensive

 

reclassified into

 

 

 

 

 

(loss) income

 

income

 

 

 

(in millions)

 

2013

 

2012

 

2013

 

2012

 

Income statement caption

 

Foreign currency forward exchange contracts —

 

 

 

 

 

 

 

 

 

 

 

Designated as cash flow hedges

 

($62)

 

($1)

 

($2)

 

$7

 

Cost of products sold

 

Not designated as hedges

 

n/a

 

n/a

 

9

 

4

 

Net foreign exchange loss

 

Interest rate swaps designated as fair value hedges

 

n/a

 

n/a

 

47

 

n/a

 

Interest expense, net

 

 

The gain of $47 million related to fair value hedges recognized in net interest expense for the three months ended September 30, 2013 was offset by $47 million in losses on the underlying hedged item, the fixed-rate debt.

 

The following table summarizes the activity for derivative instruments and the amounts and location of income (expense) and gain (loss) reclassified into income and for certain other derivative instruments for the nine months ended September 30, 2013 and 2012, respectively.  The amount of hedge ineffectiveness was not significant for the nine months ended September 30, 2013 or 2012.

 

13



Table of Contents

 

 

 

(Loss) gain

 

Income (expense)

 

 

 

 

 

recognized in other

 

and gain (loss)

 

 

 

 

 

comprehensive

 

reclassified into

 

 

 

 

 

(loss) income

 

income

 

 

 

(in millions)

 

2013

 

2012

 

2013

 

2012

 

Income statement caption

 

Foreign currency forward exchange contracts —

 

 

 

 

 

 

 

 

 

 

 

Designated as cash flow hedges

 

($53)

 

($3)

 

($4)

 

$16

 

Cost of products sold

 

Not designated as hedges

 

n/a

 

n/a

 

49

 

(17)

 

Net foreign exchange loss

 

Interest rate swaps designated as fair value hedges

 

n/a

 

n/a

 

(268)

 

n/a

 

Interest expense, net

 

 

The loss of $268 million related to fair value hedges recognized in net interest expense for the first nine months of 2013 was offset by $268 million in gains on the underlying hedged item, the fixed-rate debt.

 

Fair Value Measures

 

The fair value hierarchy under the accounting standard for fair value measurements consists of the following three levels.

 

·                  Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets that the company has the ability to access;

 

·                  Level 2 – Valuations based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market; and

 

·                  Level 3 – Valuations using significant inputs that are unobservable in the market and include the use of judgment by the company’s management about the assumptions market participants would use in pricing the asset or liability.

 

The following table summarizes the bases used to measure certain assets and liabilities that are carried at fair value on a recurring basis in the condensed consolidated balance sheets as of September 30, 2013.

 

 

 

 

 

Basis of fair value measurement

 

 

 

 

 

Quoted prices in

 

 

 

 

 

 

 

 

 

active markets for

 

Significant other

 

Significant

 

 

 

Balance at

 

identical

 

observable inputs

 

unobservable

 

(in millions)

 

September 30, 2013

 

assets (Level 1)

 

(Level 2)

 

inputs (Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$8,975

 

$533

 

$8,442

 

$—

 

Certificates of deposit

 

621

 

 

621

 

 

Equity securities

 

9

 

9

 

 

 

Foreign currency contracts

 

25

 

 

25

 

 

Total assets

 

$9,630

 

$542

 

$9,088

 

$—

 

Liabilities

 

 

 

 

 

 

 

 

 

Interest rate hedges

 

$349

 

$—

 

$349

 

$—

 

Foreign currency contracts

 

83

 

 

83

 

 

Contingent consideration

 

160

 

 

 

160

 

Total liabilities

 

$592

 

$—

 

$432

 

$160

 

 

14



Table of Contents

 

The following table summarizes the bases used to measure certain assets and liabilities that are carried at fair value on a recurring basis in the combined balance sheet as of December 31, 2012.

 

 

 

 

 

Basis of fair value measurement

 

 

 

 

 

Quoted prices in

 

 

 

 

 

 

 

 

 

active markets for

 

Significant other

 

Significant

 

 

 

Balance at

 

identical

 

observable inputs

 

unobservable

 

(in millions)

 

December 31, 2012

 

assets (Level 1)

 

(Level 2)

 

inputs (Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$5,901

 

$675

 

$5,226

 

$—

 

Certificates of deposit

 

1,775

 

 

1,775

 

 

U.S. Treasury securities

 

300

 

300

 

 

 

Equity securities

 

12

 

12

 

 

 

Foreign currency contracts

 

15

 

 

15

 

 

Total assets

 

$8,003

 

$987

 

$7,016

 

$—

 

Liabilities

 

 

 

 

 

 

 

 

 

Interest rate hedges

 

$81

 

$—

 

$81

 

$—

 

Foreign currency contracts

 

25

 

 

25

 

 

Contingent consideration

 

251

 

 

 

251

 

Total liabilities

 

$357

 

$—

 

$106

 

$251

 

 

Available-for-sale equity securities consist of investments for which the fair value is determined by using the published market price per unit multiplied by the number of units held, without consideration of transaction costs.  The derivatives entered into by the company are valued using publicized spot and forward prices for foreign currency hedges and publicized swap curves for interest rate hedges.  The contingent payments are valued using a discounted cash flow technique that reflects management’s expectations about probability and timing of payment.

 

Gross unrealized holding gains on available-for-sale equity securities totaled $2 million and $1 million at September 30, 2013 and December 31, 2012, respectively.

 

There have been no transfers of assets or liabilities between the fair value measurement levels.  The following table is a reconciliation of the fair value measurements that use significant unobservable inputs (Level 3), which consist of contingent payments related to acquisitions and investments.

 

(in millions)

 

 

 

Fair value as of December 31, 2012

 

$251

 

Payments

 

(131)

 

Additions

 

28

 

Other

 

 

Loss recognized in earnings

 

12

 

Fair value as of September 30, 2013

 

$160

 

 

In connection with the acquisition of Solvay’s U.S. pharmaceuticals business in 2010, the achievement of a certain sales milestone resulted in a payment of approximately $131 million in the first quarter of 2013 for which a liability was previously established.  Additions of $28 million related to the acquisition of product rights during the second quarter.

 

15



Table of Contents

 

In addition to the financial instruments that the company is required to recognize at fair value on the condensed consolidated balance sheets, the company has certain financial instruments that are recognized at historical cost or some basis other than fair value. The carrying values and fair values of certain financial instruments as of September 30, 2013 and December 31, 2012 are shown in the table below.

 

 

 

Book values

 

Approximate fair values

 

 

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

(in millions)

 

2013

 

2012

 

2013

 

2012

 

Assets

 

 

 

 

 

 

 

 

 

Investments

 

$114

 

$107

 

$125

 

$104

 

Liabilities

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

411

 

1,020

 

411

 

1,020

 

Current maturities of long-term debt and lease obligations

 

23

 

22

 

23

 

22

 

Long-term debt

 

14,375

 

14,630

 

14,224

 

15,066

 

 

The following table summarizes the bases used to measure the approximate fair values of the financial instruments as of September 30, 2013.

 

 

 

 

 

Basis of fair value measurement

 

 

 

 

 

Quoted prices in active

 

Significant

 

Significant

 

 

 

Fair value at

 

markets for identical

 

other observable

 

unobservable

 

(in millions)

 

September 30, 2013

 

assets (Level 1)

 

inputs (Level 2)

 

inputs (Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

Investments

 

$125

 

$—

 

$32

 

$93

 

Total assets

 

$125

 

$—

 

$32

 

$93

 

Liabilities

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

$411

 

$—

 

$411

 

$—

 

Current maturities of long-term debt and lease obligations

 

23

 

 

23

 

 

Long-term debt and lease obligations

 

14,224

 

 

14,224

 

 

Total liabilities

 

$14,658

 

$—

 

$14,658

 

$—

 

 

The following table summarizes the bases used to measure the approximate fair values of the financial instruments as of December 31, 2012.

 

 

 

 

 

Basis of fair value measurement

 

 

 

Fair value at

 

Quoted prices in active

 

Significant

 

Significant

 

 

 

December 31,

 

markets for identical

 

other observable

 

unobservable

 

(in millions)

 

2012

 

assets (Level 1)

 

inputs (Level 2)

 

inputs (Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

Investments

 

$104

 

$—

 

$32

 

$72

 

Total assets

 

$104

 

$—

 

$32

 

$72

 

Liabilities

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

$1,020

 

$—

 

$1,020

 

$—

 

Current maturities of long-term debt and lease obligations

 

22

 

 

22

 

 

Long-term debt and lease obligations

 

15,066

 

 

15,066

 

 

Total liabilities

 

$16,108

 

$—

 

$16,108

 

$—

 

 

Investments consist of cost method investments and held-to-maturity debt securities.  In determining the fair value of cost method investments, the company takes into consideration recent transactions, as well as the financial information of the investee, which represents a Level 3 basis of fair value measurement.  The fair value of held-to-maturity debt securities and long-term debt was estimated based upon the quoted market prices for the same or similar debt instruments.  The fair values of short-term and current borrowings approximate the carrying values due to the short maturities of these instruments.  The counterparties to financial instruments consist of select major international financial institutions.

 

Concentrations of Risk

The company invests excess cash in time deposits, money market funds and U.S. Treasury securities and diversifies the concentration of cash among different financial institutions.  The company monitors concentrations of credit risk associated with deposits with financial institutions.  Credit exposure limits have been established to limit a concentration with any single issuer or institution.

 

16



Table of Contents

 

Three U.S. wholesalers accounted for 39 percent and 48 percent of total net accounts receivables as of September 30, 2013 and December 31, 2012, respectively, and substantially all of AbbVie’s U.S. sales are to these three wholesalers.  In addition, net governmental receivables outstanding in Greece, Portugal, Italy and Spain totaled $804 million at September 30, 2013 and $725 million at December 31, 2012.

 

Short-Term Borrowings

During the nine months ended September 30, 2013, the company issued and redeemed commercial paper, of which $400 million was outstanding as of September 30, 2013, with a weighted-average interest rate of 0.3 percent for the nine months ended September 30, 2013.  There were no borrowings outstanding under the company’s credit facility as of September 30, 2013.

 

Note 8

 

Accumulated Other Comprehensive Loss

 

 

The following table summarizes the changes in balances of each component of accumulated other comprehensive loss, net of tax as of September 30, 2013.

 

 

 

Foreign

 

Pension and

 

Unrealized

 

 

 

 

 

 

 

currency

 

post-

 

gains (losses) on

 

Gains (losses)

 

 

 

 

 

translation

 

employment

 

marketable

 

on hedging

 

 

 

(in millions) (brackets denote losses)

 

adjustments

 

benefits

 

equity securities

 

activities

 

Total

 

Balance as of December 31, 2012

 

$181

 

($511)

 

$1

 

($21)

 

($350)

 

Other comprehensive income before reclassifications

 

23

 

20

 

 

(53)

 

($10)

 

Amounts reclassified from accumulated other comprehensive income

 

 

57

 

 

4

 

$61

 

Net current-period other comprehensive income

 

23

 

77

 

 

(49)

 

$51

 

Separation-related adjustments

 

241

 

(934)

 

 

11

 

($682)

 

Balance as of September 30, 2013

 

$445

 

($1,368)

 

$1

 

($59)

 

($981)

 

 

The table below presents the significant amounts reclassified out of each component of accumulated other comprehensive loss for the three and nine months ended September 30, 2013.

 

 

 

Three months ended

 

Nine months ended

 

Type of reclassification (in millions)

 

September 30, 2013

 

September 30, 2013

 

Pension and post-employee benefits

 

 

 

 

 

Amortization of actuarial losses and other

 

$30

 

$83

 

Less tax expense

 

(8)

 

(26)

 

Total reclassification, net of tax

 

$22

 

$57

 

 

Note 9

 

Post-Employment Benefits

 

 

Prior to separation, AbbVie employees participated in certain U.S. and international defined benefit pension and other post-employment (OPEB) plans sponsored by Abbott.  These plans included participants of Abbott’s other businesses and were accounted for as multi-employer plans in AbbVie’s combined financial statements.  As a result, no asset or liability was recorded by AbbVie in the historical balance sheets through December 31, 2012 to recognize the funded status of these plans.  In connection with the separation of AbbVie from Abbott on January 1, 2013, these plans were separated.  As a result, AbbVie assumed obligations previously provided by Abbott and a portion of certain plans owned by AbbVie at December 31, 2012 were transferred to Abbott.

 

17



Table of Contents

 

The amounts shown in the table below reflect the amount of AbbVie’s assumption of the net obligations for pension and other post-employment benefits.

 

 

 

 

 

Other

 

 

 

Defined

 

post-employment

 

(in millions)

 

benefit plans

 

plans

 

Accumulated benefit obligation

 

$2,423

 

$192

 

Deferred losses

 

(1,434)

 

(2)

 

 

 

 

 

 

 

Projected benefit obligations

 

2,910

 

192

 

Fair value of assets

 

2,216

 

 

Net liability

 

$694

 

$192

 

 

The net liabilities assumed increased $72 million for defined benefit plans and decreased $78 million for OPEB plans during the third quarter of 2013 as a result of the finalization of the legal split of these plans.

 

Net Periodic Benefit Cost

 

The following is a summary of net periodic benefit cost relating to the company’s pension and other post-employment benefit (OPEB) plans.

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

Defined benefit plans

 

2013

 

2012

 

2013

 

2012

 

Service cost

 

$39

 

$5

 

$133

 

$13

 

Interest cost

 

46

 

8

 

142

 

25

 

Expected return on plan assets

 

(63)

 

(7)

 

(195)

 

(17)

 

Amortization of actuarial losses and prior service costs

 

30

 

2

 

83

 

3

 

Net periodic pension benefit cost

 

$52

 

$8

 

$163

 

$24

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

Other post-employment plans

 

2013

 

2012

 

2013

 

2012

 

Service cost

 

$5

 

$—

 

$17

 

$—

 

Interest cost

 

2

 

 

14

 

 

Expected return on plan assets

 

 

 

 

 

Amortization of actuarial losses and prior service costs

 

 

 

 

 

Net periodic pension benefit cost

 

$7

 

$—

 

$31

 

$—

 

 

In the first quarter of 2013, AbbVie made a voluntary contribution of $145 million to its main domestic defined benefit pension plan.

 

Note 10

 

Stock-Based Compensation

 

 

Stock-based compensation expense was $41 million and $30 million for the three months ended September 30, 2013 and 2012, respectively, and $175 million and $156 million for the nine months ended September 30, 2013 and 2012, respectively.  Stock-based compensation expense for the three and nine months ended September 30, 2012 was allocated to AbbVie based on the portion of Abbott’s incentive stock program in which AbbVie employees participated.

 

Prior to separation, AbbVie employees participated in Abbott’s incentive stock program.  Adopted after the separation, the AbbVie Incentive Stock Program provides for the assumption of certain awards granted under Abbott’s incentive stock program and authorizes the grant of several different forms of benefits, including nonqualified stock options, RSAs, and RSUs.

 

In connection with the separation, employee stock options, RSAs and RSUs were adjusted and converted into new equity awards using a formula designed to preserve the intrinsic value and fair value of the awards immediately prior to the separation.  Upon the separation on January 1, 2013, holders of Abbott stock options, RSAs and RSUs generally received one AbbVie stock-based award for each Abbott stock-based award outstanding.  Converted awards retained the vesting schedule and expiration date of the original awards.

 

18



Table of Contents

 

Stock Options

The expense related to stock options granted during the nine months ended September 30, 2013 was primarily based on the assumptions shown in the table below. There were no significant stock options granted in the three months ended September 30, 2013.

 

Risk-free interest rate

 

1.1%

 

Average life of options (years)

 

6.0

 

Volatility

 

32.63%

 

Dividend yield

 

4.3%

 

Fair value per stock option

 

$6.87

 

 

The following table summarizes AbbVie stock option activity for both AbbVie and Abbott employees for the nine months ended September 30, 2013.

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

average

 

 

 

 

 

 

 

average

 

remaining life (in

 

Aggregate

 

(options in thousands, aggregate intrinsic value in millions)

 

Options

 

exercise price

 

years)

 

intrinsic value

 

Outstanding at December 31, 2012

 

 

$—

 

 

 

 

 

Options converted on January 1, 2013

 

47,718

 

27.00

 

 

 

 

 

Granted

 

3,128

 

37.91

 

 

 

 

 

Exercised

 

(11,041)

 

27.47

 

 

 

 

 

Lapsed

 

(221)

 

27.71

 

 

 

 

 

Outstanding at September 30, 2013

 

39,584

 

$27.73

 

3.7

 

$677

 

Exercisable at September 30, 2013

 

36,007

 

$27.28

 

3.3

 

$632

 

 

The aggregate intrinsic value in the table above represents the difference between the exercise price and the company’s closing stock price on the last day of trading for the period ended September 30, 2013.  The total intrinsic value of options exercised in the three and nine months ended September 30, 2013 was $41 million and $157 million, respectively.

 

As of September 30, 2013, $3 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over approximately the next two years.

 

RSAs & RSUs

The following table summarizes AbbVie RSA and RSU balances for both AbbVie and Abbott employees for the nine months ended September 30, 2013.

 

 

 

 

 

Weighted-average

 

(share units in thousands)

 

Share units

 

grant date fair value

 

Outstanding at December 31, 2012

 

 

$—

 

Awards converted on January 1, 2013

 

15,394

 

27.55

 

Granted

 

7,387

 

36.18

 

Vested

 

(7,483)

 

27.30

 

Lapsed

 

(423)

 

30.39

 

Outstanding at September 30, 2013

 

14,875

 

$31.89

 

Unvested shares at September 30, 2013

 

14,719

 

$31.90

 

 

The fair value of restricted stock awards and units is determined based on the quoted price of the company’s common stock on the date of the grant.  The fair market value of restricted stock awards and units vested in the three and nine months ended September 30, 2013 was $5 million and $282 million, respectively.  As of September 30, 2013, $198 million of unrecognized compensation cost related to RSAs and RSUs is expected to be recognized as expense over approximately the next two years.

 

Note 11

Income Taxes

 

 

In AbbVie’s historical financial statements prior to the separation, income tax expense and deferred tax balances were calculated on a separate tax return basis although AbbVie’s operations had historically been included in the tax returns filed by the respective

 

19



Table of Contents

 

Abbott entities of which the AbbVie business was a part.  Subsequent to the separation, AbbVie files tax returns on its own behalf and its income tax expense and deferred income tax balances have been recorded in accordance with AbbVie’s stand-alone income tax positions.  AbbVie and Abbott entered into a tax sharing agreement effective on the date of separation.  For tax contingencies prior to the separation, Abbott will indemnify and hold AbbVie harmless if the tax positions are settled for amounts in excess of recorded liabilities, and AbbVie will not benefit if prior tax positions are resolved more favorably than recorded amounts.

 

The effective income tax rate was 25.0 percent and 22.9 percent for the three and nine months ended September 30, 2013 and 1.2 percent and 7.0 percent for the three and nine months ended September 30, 2012, respectively.  The effective tax rates in each period were less than the statutory federal income tax rate of 35 percent principally due to the benefit of lower statutory tax rates and tax exemptions in certain foreign jurisdictions.  The increase in the effective tax rates for the three and nine months ended September 30, 2013 over the prior year periods was principally due to income tax expense relating to certain 2013 earnings outside the United States that are not deemed indefinitely reinvested, as well as the impact of $190 million of tax benefits recognized in the third quarter of 2012 as a result of the favorable resolution of various tax positions pertaining to a prior year.  AbbVie will continue to evaluate whether to indefinitely reinvest certain future earnings in foreign jurisdictions as it analyzes its future global liquidity and financial structure.

 

Note 12

Litigation

 

 

AbbVie is involved in various claims, legal proceedings and investigations.  The recorded accrual balance for litigation at September 30, 2013 was not significant.  Within the next year, other legal proceedings may occur that may result in a change in the estimated loss accrued by AbbVie.  While it is not feasible to predict the outcome of all other proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on AbbVie’s consolidated financial position, cash flows, or results of operations.

 

The U.S. Department of Justice, through the U.S. Attorney for the Western District of Virginia, and various state Attorneys General investigated AbbVie’s sales and marketing activities for Depakote.  The government sought to determine whether any of these activities violated civil and/or criminal laws, including the Federal False Claims Act, the Food, Drug and Cosmetic Act, and the Anti-Kickback Statute in connection with Medicare and/or Medicaid reimbursement to third parties.  The state Attorneys General offices sought to determine whether any of these activities violated various state laws, including state consumer fraud/protection statutes.  AbbVie recorded charges of $1.5 billion in the third quarter of 2011 and $100 million in the first quarter of 2012 related to civil and criminal claims arising from this matter.  In May 2012, AbbVie reached resolution of all Depakote-related federal claims, Medicaid-related claims with 49 states and the District of Columbia, and consumer protection claims with 45 states and the District of Columbia.  In 2012, AbbVie paid approximately $1.6 billion for the settlement.  The payments were material to AbbVie’s cash flows in 2012.

 

20



Table of Contents

 

Note 13

Segment Information

 

 

AbbVie operates in one business segment—pharmaceutical products.  Substantially all of AbbVie’s U.S. sales are to three wholesalers.  Outside the United States, products are sold primarily to health care providers or through distributors, depending on the market served.  Worldwide net sales of key products were as follows.

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

(in millions)

 

2013

 

2012

 

2013

 

2012

 

HUMIRA

 

$2,770

 

$2,326

 

$7,620

 

$6,585

 

AndroGel

 

248

 

279

 

746

 

787

 

Kaletra

 

237

 

267

 

734

 

763

 

Niaspan

 

201

 

232

 

619

 

634

 

Lupron

 

196

 

189

 

576

 

589

 

Synthroid

 

161

 

131

 

433

 

383

 

Sevoflurane

 

138

 

135

 

412

 

444

 

Creon

 

101

 

92

 

297

 

248

 

Zemplar

 

100

 

91

 

288

 

276

 

Synagis

 

98

 

96

 

513

 

506

 

Duodopa

 

46

 

37

 

129

 

108

 

TriCor/TRILIPIX

 

39

 

332

 

274

 

897

 

All other

 

323

 

301

 

1,038

 

954

 

Net sales

 

$4,658

 

$4,508

 

$13,679

 

$13,174

 

 

21



Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following is a discussion and analysis of the financial condition of AbbVie Inc. (AbbVie or the company) and the results of operations as of and for the third quarter and first nine months ended September 30, 2013.  This commentary should be read in conjunction with the condensed consolidated financial statements and accompanying notes appearing under “Item 1. Financial Statements and Supplementary Data.”

 

EXECUTIVE OVERVIEW

 

AbbVie is a global, research-based biopharmaceutical company.  AbbVie develops and markets advanced therapies that address some of the world’s most complex and serious diseases.  AbbVie products are used to treat rheumatoid arthritis, psoriasis, Crohn’s disease, HIV, cystic fibrosis complications, low testosterone, thyroid disease, Parkinson’s disease, ulcerative colitis, and complications associated with chronic kidney disease, among other indications.  AbbVie also has a pipeline of promising new medicines, including more than 20 compounds or indications in Phase II or Phase III development across such important medical specialties as immunology, renal care, hepatitis C virus (HCV), women’s health, oncology, and neuroscience, including multiple sclerosis and Alzheimer’s disease.  AbbVie has approximately 21,500 employees and its products are sold in over 170 countries.  AbbVie operates in one business segment – pharmaceutical products.

 

AbbVie’s products include a broad line of adult and pediatric pharmaceuticals manufactured, marketed, and sold worldwide and are generally sold directly to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from distribution centers and public warehouses.  Outside the United States, sales are made either directly to customers or through distributors, depending on the market served.  Certain products are co-marketed or co-promoted with other companies.

 

Research and Development

 

Research and development (R&D) innovation and scientific productivity continue to be key strategic priorities for AbbVie.  AbbVie’s long-term success depends to a great extent on its ability to continue to discover and develop innovative pharmaceutical products and acquire or collaborate on compounds currently in development at other biotechnology or pharmaceutical companies.  R&D is focused on therapeutic areas that include virology, renal disease, neuroscience, oncology, immunology, and women’s health, among others.

 

AbbVie continues to execute on its long-term strategy of advancing its new product pipeline and maximizing its existing portfolio through new indications and formulations.  Significant developments in R&D during the first nine months of 2013 included the following:

 

·                  AbbVie continues to dedicate R&D efforts to expanding indications for HUMIRA, including in the fields of rheumatology, ophthalmology and dermatology.  Additionally, during the second quarter of 2013, the company secured approval for two new gastroenterology indications in Japan – intestinal Behcet’s and ulcerative colitis.  As of September 30, 2013, HUMIRA’s list of uses totals ten indications in major geographies, including nine approved in Europe and seven in the United States.

 

·                  The company released positive Phase IIb results from a study examining interferon-free therapies for the treatment of chronic HCV infection.  The data showed patients achieved sustained virologic response rates regardless of baseline characteristics that have been associated with a lower response to interferon-based therapies.  The company completed enrollment in a comprehensive Phase III program for genotype 1 HCV that involves combinations of ABT-450, a protease inhibitor for HCV infection; ABT-333, a polymerase inhibitor; and ABT-267, a NS5A inhibitor with and without ribavirin.

 

·                  AbbVie initiated a Phase III study to assess the effects of the investigational compound atrasentan, when added to standard of care, on progression of kidney disease in patients with stage 2 to 4 chronic kidney disease and type 2 diabetes.

 

·                  The company received U.S. Food and Drug Administration (FDA) approval for Creon 36,000 lipase-unit capsules for patients with exocrine pancreatic insufficiency.  Creon 36,000 is the highest dose of pancreatic therapy currently available for patients.

 

22



Table of Contents

 

·                  The company’s registration submission for Duopa, our levodopa and carbidopa intestinal gel for the treatment of Parkinson’s disease, was filed with the FDA.

 

·                  The company recently started a second Phase III pivotal trial to evaluate elagolix, an oral gonadotropin-releasing hormone antagonist for the treatment of endometriosis-related pain.

 

For a more comprehensive discussion of AbbVie’s products and pipeline, refer to the company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

Separation from Abbott Laboratories

 

On January 1, 2013, AbbVie became an independent, publicly-traded company as a result of the distribution by Abbott Laboratories (Abbott) of 100 percent of the outstanding common stock of AbbVie to Abbott’s shareholders (the separation).  Each Abbott shareholder of record as of the close of business on December 12, 2012 received one share of AbbVie common stock for each Abbott common share held as of the record date.  AbbVie was incorporated in Delaware on April 10, 2012 and is comprised of Abbott’s former research-based proprietary pharmaceuticals business.  AbbVie’s registration statement on Form 10 was declared effective by the U.S. Securities and Exchange Commission on December 7, 2012.  AbbVie’s common stock began trading “regular-way” under the ticker symbol “ABBV” on the New York Stock Exchange on January 2, 2013.  Refer to the “Basis of Presentation” below for further information.

 

Basis of Presentation

 

Prior to the separation, the historical financial statements were prepared on a stand-alone basis and were derived from Abbott’s consolidated financial statements and accounting records as if the former research-based pharmaceutical business of Abbott had been part of AbbVie for all periods presented.  Accordingly, AbbVie’s financial statements for periods prior to January 1, 2013 are presented on a combined basis and reflect AbbVie’s financial position, results of operations and cash flows as its business was operated as part of Abbott prior to the separation, in conformity with U.S. GAAP.  The historical combined financial statements also reflect an allocation of expenses related to certain Abbott corporate functions, including senior management, legal, human resources, finance, information technology and quality assurance.  These expenses were allocated to AbbVie based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of revenues, headcount, square footage, number of transactions or other measures.  AbbVie considers the expense allocation methodology and results to be reasonable.  However, the allocations may not be indicative of the actual expenses that would have been incurred had AbbVie operated as an independent, stand-alone, publicly-traded company for the periods presented.

 

The historical combined financial statements reflected the operating results and financial position of AbbVie as it was operated by Abbott, rather than as an independent company.  AbbVie will incur additional ongoing operating expenses to operate as an independent company.  These costs will include the cost of various corporate headquarters functions, incremental information technology-related costs, and incremental costs to operate a stand-alone back office infrastructure outside the United States.  In order to establish these stand-alone functions, AbbVie will also incur non-recurring expenses and capital expenditures.

 

It is not practicable to estimate the costs that would have been incurred in each of the periods presented in the historical financial statements for the functions described above.  Actual costs that would have been incurred if AbbVie operated as a stand-alone company during these periods would have depended on various factors, including organizational design, outsourcing and other strategic decisions related to corporate functions, information technology, and international back office infrastructure.

 

23



Table of Contents

 

RESULTS OF OPERATIONS

 

Net Sales

 

 

 

 

 

 

 

Percent change

 

 

 

 

 

Percent change

 

 

 

Three months ended

 

At actual

 

At constant

 

Nine months ended

 

At actual

 

At constant

 

 

 

September 30,

 

currency rates

 

currency rates

 

September 30,

 

currency rates

 

currency rates

 

(in millions)

 

2013

 

2012

 

2013

 

2013

 

2013

 

2012

 

2013

 

2013

 

United States

 

$2,616

 

$2,665

 

(2)%

 

(2)%

 

$7,363

 

$7,362

 

—%

 

—%

 

International

 

2,042

 

1,843

 

11%

 

12%

 

6,316

 

5,812

 

9%

 

10%

 

Net sales

 

$4,658

 

$4,508

 

3%

 

4%

 

$13,679

 

$13,174

 

4%

 

5%

 

 

Sales growth in the third quarter and first nine months of 2013 was driven by the continued strength of HUMIRA, both in the United States and internationally.  Total company sales growth was also driven by sales of key products including Synthroid, Creon, Zemplar and Duodopa.  Sales increased in the third quarter and first nine months of 2013 despite the loss of exclusivity for TriCor in November 2012, for TRILIPIX in July 2013, and Niaspan in mid-September 2013, as well as unfavorable foreign exchange rate fluctuations.

 

The following table details the sales of key products.

 

 

 

 

 

 

 

Percent change

 

 

 

 

 

Percent change

 

 

 

Three months ended

 

At actual

 

At constant

 

Nine months ended

 

At actual

 

At constant

 

 

 

September 30,

 

currency
rates

 

currency
rates

 

September 30,

 

currency
rates

 

currency
rates

 

(in millions)

 

2013

 

2012

 

2013

 

2013

 

2013

 

2012

 

2013

 

2013

 

HUMIRA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$1,389

 

$1,136

 

22%

 

22%

 

$3,569

 

$2,964

 

20%

 

20%

 

International

 

1,381

 

1,190

 

16%

 

16%

 

4,051

 

3,621

 

12%

 

13%

 

Total

 

$2,770

 

$2,326

 

19%

 

19%

 

$7,620

 

$6,585

 

16%

 

16%

 

AndroGel

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$248

 

$279

 

(11)%

 

(11)%

 

$746

 

$787

 

(5)%

 

(5)%

 

Kaletra

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$63

 

$71

 

(11)%

 

(11)%

 

$181

 

$196

 

(8)%

 

(8)%

 

International

 

174

 

196

 

(11)%

 

(11)%

 

553

 

567

 

(3)%

 

(1)%

 

Total

 

$237

 

$267

 

(11)%

 

(11)%

 

$734

 

$763

 

(4)%

 

(3)%

 

Niaspan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$201

 

$232

 

(13)%

 

(13)%

 

$619

 

$634

 

(2)%

 

(2)%

 

Lupron

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$141

 

$132

 

7%

 

7%

 

$410

 

$414

 

(1)%

 

(1)%

 

International

 

55

 

57

 

(4)%

 

(2)%

 

166

 

175

 

(5)%

 

(4)%

 

Total

 

$196

 

$189

 

4%

 

4%

 

$576

 

$589

 

(2)%

 

(2)%

 

Synthroid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$161

 

$131

 

23%

 

23%

 

$433

 

$383

 

13%

 

13%

 

Sevoflurane

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$19

 

$20

 

(5)%

 

(5)%

 

$54

 

$53

 

2%

 

2%

 

International

 

119

 

115

 

4%

 

6%

 

358

 

391

 

(8)%

 

(6)%

 

Total

 

$138

 

$135

 

2%

 

4%

 

$412

 

$444

 

(7)%

 

(5)%

 

Creon

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$101

 

$92

 

10%

 

10%

 

$297

 

$248

 

20%

 

20%

 

Zemplar

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$57

 

$52

 

10%

 

10%

 

$161

 

$161

 

—%

 

—%

 

International

 

43

 

39

 

10%

 

8%

 

127

 

115

 

10%

 

10%

 

Total

 

$100

 

$91

 

10%

 

9%

 

$288

 

$276

 

4%

 

4%

 

Synagis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

International

 

$98

 

$96

 

2%

 

16%

 

$513

 

$506

 

1%

 

10%

 

Duodopa

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

International

 

$46

 

$37

 

24%

 

19%

 

$129

 

$108

 

19%

 

17%

 

TriCor/TRILIPIX

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$39

 

$332

 

(88)%

 

(88)%

 

$274

 

$897

 

(70)%

 

(70)%

 

Other

 

$323

 

$301

 

10%

 

10%

 

$1,038

 

$954

 

3%

 

3%